Equity and efficiency impacts of rural land rental restrictions:

Evidence from India Land Policies & Legal Empowerment of the Poor

Nov 3, 2006H.K. Nagarajan, Klaus Deininger, Songqing Jin

Background & Motivation

Rental markets: Concepts & Empirical evidence • Transfer (temporary) to better cultivators; low risk• Facilitate link to off-farm economy; consolidation of holdings • Rapid expansion with economic growth (China, Vietnam)• But: Limited extent in India – why and what to do about it?

Questions to be addressed • Origin & justification of rental restrictions • Are land markets still backward & exploitative? • What is the equity/efficiency impact of rental restrictions?

Methodology • Simple household model of land market participation• Use of state-level variation in rental restrictions • Measure for household ability to assess productivity impact

Origin & nature of rental restrictions

Land-reform related interventions • Elimination of intermediaries • Ownership ceilings • Tenancy reform: Rent ceilings & tenancy rights

Variations in implementation effort • Slow implementation• Many loopholes • Limitations in scope

Evidence on impact • Nation-wide state level regressions• West Bengal? • Second generation problems?

Evidence on implementationState Tenancy laws Ceiling laws Area (%) Pop. (%) Area (%) Pop. (%) AP 3.48 0.75 8.34 3.81 Bihar 0.00 0.00 4.42 4.00 Gujarat 15.00 11.20 1.95 0.31 Haryana 0.51 0.01 1.26 0.26 HP 0.16 3.19 0.06 0.05 KA 15.38 5.29 1.71 0.30 Kerala 8.47 12.49 1.30 1.04 MP 2.15 0.61 2.69 0.71 MA 27.01 10.68 7.74 1.08 Orissa 0.15 1.43 2.24 1.28 Punjab 1.89 0.04 1.50 0.25 Rajasthan 0.00 0.16 6.63 0.75 TN 3.65 3.23 2.47 1.24 UP 0.00 0.00 5.81 3.68 WB 6.41 10.80 14.91 19.73 Total 5.45 5.35 4.41 2.27

Theoretical predictions

Rental restrictions in urban areas • Textbook example for policy distortion• Benefits sitting tenants; reduces mobility• Reduces investment & supply of land to rental market • Social cost will increase over time as demand increases

Reasons for greater importance in rural areas • Higher elasticity of supply (self or wage cultivation) • Impact on productive efficiency: Size & generational shift • Sharecropping less flexible with possibly high investment impact

Evidence from studies in India • Case studies: High level of informality; contravention of law• Aggregate studies: Positive short-term impact of reforms• But no assessment of cost or longer-term effects • This will be needed to guide policy

Model Setup Households endowed with endowments of labor

( ) and land ( ), and agricultural ability (i)

Households divide labor between farm work and off-farm wage employment

No farm labor market, renting of land incurs transaction costs

Households maximize income by optimizing labor allocation and choosing optimal operated land size through rental

Policy restrictions (3 versions) affect transaction costs

iL iA

Conceptual framework

))(())((),(,

outi

outinii

inoii

aiia TrAAITrAAIwlAlfp

Al

Max (P)

wAlfp ia

ili ai

),( (1)

or for households who rent in, ini

aiAi TrAlfp

i),( (2a)

or for households who rent out, outi

aiAi TrAlfp

i),( (2b)

and for autarkic households, ini

aiAi

out TrAlfpTri

),( (2c)

P 1: Rental markets transfer land to “land-poor but efficient” producers

P 2: Rental restrictions decrease l and increase u

P 3: Increases of off-farm wage increase supply to rental market

Data & descriptive statistics

Data sources • NCAER ARIS/REDS panel data 1982 & 1999• About 7,500 obs. in 2 periods

Household characteristics • Increased educational attainment (26% to 50%)• Narrowing of N-S gap; asset inequality decreased• Land p.c. dropped; income growth of 3% p.a.

Economic structure • Agriculture very important (70% to 63%) • Higher participation in agr. wage employment (36% to 43%) • Share of self-employment broadly constant

All North West East South Basic characteristics Household size 6.02 6.64 6.10 6.30 5.21 Members below 14 1.86 2.15 2.02 1.93 1.36 Members 14 – 60 3.75 4.01 3.68 4.02 3.44 Head w. > primary 0.50 0.56 0.42 0.54 0.51 Land 2.12 1.99 2.82 1.29 1.86 Landless dummy (%) 23.93 27.16 21.10 23.41 25.03 Expenditure Per capita exp. 1561 1803 1526 1287 1579 Gini (per capita exp.) 0.31 0.31 0.30 0.36 0.28 Value of assets (Rs.) 47749 66529 43810 29298 48688 Gini (assets) 0.56 0.55 0.53 0.59 0.54 Participation in activities Crop production 62.89 67.45 68.41 61.29 53.15 Livestock production 62.85 72.90 66.88 55.16 54.26 Non-farm self-empl. 10.96 7.86 10.77 20.73 7.41 Salaried employment 17.27 27.33 13.59 16.22 13.90 Wage employment 43.29 28.27 44.98 53.94 47.05

Key household characteristics by region

Rental Activity and Determinants

• Rental market activity – Increase in overall activity (5 to 10% out)– More hhs renting than benefited from reform– Increased share of landless (12 to 37%)

• Characteristics by nature of market participation – Asset-poor rent in, rich rent out – Gap narrowed slightly over time in panel– High share of wage workers renting in

Household characteristics by rental status (99) Rent-out Autarky Rent-in Basic Characteristics Household size 5.54** 6.04 6.91** Members below 14 1.53** 1.87 2.38** Members 14 – 60 3.45** 3.77 4.17** Land endowment (ha) 2.87** 2.02** 1.27** Land endowment p.c. 0.64** 0.36** 0.20** Landless dummy (%) 0.00** 26.29** 37.34** Head's age 51.65** 48.98** 47.41* Female head (%) 8.90** 6.54 3.30* Head w. > primary (%) 61.53** 48.51** 49.50 Value of all assets (Rs) 62466** 46568** 33839** Econ. participation Crop production 23.07** 66.12** 100.00** Livestock production 49.88** 63.57** 81.82** Non-farm self-empl. 17.96** 9.90** 14.61* Salaried employment 30.05** 15.98** 10.71** Casual wage emp’t 23.94** 44.93** 59.74**

Determinants of market participation

• Overall equation – Landless and –poor, labor abundant likely to rent in – Education, village income increase renting out – Ability increase rent-in; robust to inclusion– No minimum wealth requirement; input/credit market

• Lower bound (out to autarky) – Policy variables: More autarky; laws < implement.– SC/ST increases & time decreases transaction costs

• Upper bound (autarky to in) – Implementation, but not law increases autarky – Autarky areas decreased, i.e. markets more active– But: long time to offset impacts of restrictions

Determinants of participation in land rental markets Tenants

rec’d Ceiling

land red. Tenancy

laws Main equation Landless dummy 0.623*** 0.626*** 0.622*** Land endowment -0.012*** -0.013*** -0.011*** Members 14-60 0.063*** 0.062*** 0.060*** Head >= primary -0.148*** -0.153*** -0.161*** Village inc. (log) -0.090*** -0.077*** -0.072*** Total assets (log) 0.010 0.008 0.011 Off-farm share -1.194*** -1.180*** -1.216*** Lower bound (rent out to autarky) Policy variable -12.30*** -1.502** -0.110*** ST/SC dummy -0.200*** -0.178*** -0.187*** OBC dummy -0.105** -0.104** -0.093** 1999 dummy 0.527*** 0.454*** 0.451*** Upper bound (autarky to rent in) Policy variable 12.697*** 2.551*** 0.018 ST/SC dummy 0.166** 0.148** 0.165** OBC dummy 0.148** 0.116* 0.147** 1999 dummy -0.239*** -0.245*** -0.258*** Observations 11331 11147 11221 Log likelihood -4564.94 -4450.96 -4514.77

Equity & efficiency impacts

• Why expect differential impacts? – Circumventing restrictions easier for rich than poor – Is there a trade-off between equity & efficiency?

• Empirical results – Restrictions wipe out advantage of landless in

accessing land– Once this accounted for, no more effect of legislation– Robust to inclusion of ability – Increases autarky band for higher ability people

Interacting policy with efficiency and landlessness Main equation Landless dummy 0.768*** 0.850*** Land endowment -0.012*** -0.029*** Head >= primary -0.148*** -0.122*** Village inc. (log) -0.096*** -0.106*** Total assets (log) 0.010 0.011 Off-farm share -1.254*** -1.632*** Ability 0.384*** Lower bound (rent out to autarky) Tenancy enf’t -13.250*** -26.524*** Tenancy *ability 32.764*** ST/SC dummy -0.187*** -0.134** OBC dummy -0.105** -0.042 1999 dummy 0.528*** 1.427*** Upper bound (autarky to rent in) Tenancy enf’t 2.884 -0.109 Tenancy * landless 55.098*** 35.528*** Tenancy * ability 7.689 ST/SC dummy 0.147** 0.092 OBC dummy 0.143** 0.170*** 1999 dummy -0.180** 0.144*

Variation over time & equity impact

• Is there a justification for restrictions? – Wealth bias in 1982, no more in 1999– No reverse tenancy, increased supply by large

owners– Monopolistic landlord behavior to extract rent?

• Potential equity impact of rental access – Mean return/labor day close to R 150 (= VMPL)– Compare to wage rate for ag. labor: R 46 or 34 – -> Significant welfare gains, especially for women

Determinants of rental market participation Rent in Rent out Cultivation ability 0.017** -0.022* Log area owned (α1) -0.003*** 0.001 Area * 1999 (α2) 0.013* 0.053*** Head >= primary (β1) -0.008 -0.023 Primary * 1999 (β2) -0.004** 0.004*** Log total assets (γ1) 0.012** 0.016** Assets * 1999 (γ2) -0.011* -0.017* Off-farm share (δ1) -0.096* 0.047 Off-farm * 1999 (δ2) 0.020 0.166** Village income (ζ1) 0.010 0.011 Vill. Inc. * 1999 (ζ2) -0.021*** -0.002 Landless dummy (η1) 0.573*** Landless * 1999 (η2) -0.041*** Members < 14 years 0.002*** -0.008*** Members 14-60 yrs 0.002*** -0.008*** Share w tenancy right -0.434** -0.339 Tenancy r * landless -1.626** Tenancy r * ability -1.051** -1.379** 1999 dummy 0.242*** 0.260** Tests: α 1 + α2=0 17.83*** 23.05*** β 1 + β2 = 0 1.55 23.45*** γ1 + γ2 = 0 0.71 0.01

Conclusion and policy implications

• Land rental market functioning – Improve equity and efficiency – Wealth bias eliminated over time– But impeded by tenancy legislation – Large benefits from increased access (women)

• Policy implications – Improve equity & efficiency by reducing restrictions– Doing so is not infeasible– Sitting tenants’ welfare to be considered – This can increase welfare significantly but is second

best to deal with problem of inequality